CalSTRS Updates Corporate Governance Principles; Supports Board Nomination Power For Prominent Shareholders

board room chair

CalSTRS has updated its set of corporate governance principles to include support for proxy access – the right of a shareholder to nominate corporate board members.

The pension fund supports giving proxy access to shareholders that own at least three percent of a company’s shares for at least three years.

More from a release:

The updated principles, for the first time, specify CalSTRS support of proposals giving a group of shareholders, owning three percent of a company’s shares for at least three years, access to board nominations and to the company’s proxy statement. The CalSTRS Corporate Governance Principles lay out the basis for how the fund carries out its corporate governance initiatives. The Investment Committee adopted the updates at its February 6 meeting.

“CalSTRS has steadfastly supported the 2011 rule, proposed by the Securities and Exchange Commission, that allows shareholder groups access to board director nominations with what we call a three-and-three ownership structure,” said CalSTRS Director of Corporate Governance Anne Sheehan. “We firmly believe this is the most appropriate threshold for proxy access.”

[…]

Without a universal rule from regulators, CalSTRS and like-minded institutional investors have waged proxy access efforts, company by company.

“CalSTRS will, in the coming proxy season, support any shareholder proposal that includes a three-and-three group structure,” said Ms. Sheehan. “Our intention is to oppose any proxy access proposal with a structure more onerous than three-and-three ownership by a group of shareholders.”

[…]

CalSTRS Corporate Governance unit will also urge fellow shareholders to withhold their votes from company directors who either exclude a three-and-three shareholder proposal from the proxy statement, or who deliberately preempt such a shareholder proposal with one of their own that establishes more excessive thresholds.

Read the full release here.

Read the pension fund’s Corporate Governance Principles here.

Pension Funds, Other Shareholders Pressure Oracle CEO Over High Pay With Letter to SEC

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The CEO of the Oracle software company, Larry Ellison, is one of the highest paid executives in the United States ($67.3 million in 2014) despite numerous calls by shareholders to reduce his compensation package.

Shareholders are fed up. They, led by two of Europe’s largest pension funds, are on Monday filing a letter with the Securities and Exchange Commission (SEC) regarding their concerns with the Oracle’s corporate governance.

From the Financial Times:

Larry Ellison, one of the highest paid executives in the US and co-founder of the Oracle software company, has come under renewed pressure from shareholders over his “excessive” remuneration and “unprecedented” failure to engage with investors.

The Netherlands’ second-largest asset manager and one of the UK’s largest pension funds, will on Monday file a letter to Oracle with the Securities and Exchange Commission, outlining their corporate governance concerns.

More than half of the group’s shareholders have voted against the executive compensation scheme in each of the past three years.

[…]

PGGM of the Netherlands and Railpen, the UK’s Railway Pension Trustee Company, say the company’s “lack of communication” has heightened their concern over pay, boardroom accountability and the independence of non-executive directors.

It is rare for such groups to go public with criticism of a company they invest in, underlining their anger and frustration after four years of trying to engage with the board and company executives.

In their letter to the company, they say: “As global investors, we believe that governance risk is particularly heightened in companies in which the founder serves as CEO or otherwise remains in a leadership role with the company.”

The pension funds aren’t a particularly large shareholder in Oracle – combined they only own about a 0.16 stake in the company, according to the Financial Times.

 

Photo by Securities and Exchange Commission via FLickr CC License

Private Equity Firms May Inflate Returns, Claims Research

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Private equity firms now manage hundreds of billions of dollars of public pension money, in part because the asset class advertises its ability to deliver strong returns without the volatility of the stock market.

Due to the illiquid nature of private equity, the industry’s return figures are often estimates – a valuation of what the firm’s investment would have sold for, had it been sold.

But new research from George Washington University suggests that private equity firms inflate the on-paper value of their investments.

More details from the International Business Times, which received an advanced look at the soon-to-be-released research:

Now comes new data from [investment banker Jeffrey] Hooke and George Washington University’s Ted Barnhill and Binzi Shu that purports to prove mathematically that the private equity industry’s books are misleading.

The researchers essentially created a portfolio of publicly traded companies that they say closely resembles the kinds of privately owned companies that private equity investors buy. The researchers then weighted their public companies’ returns to reflect the same level of debt that private equity firms typically impose on their portfolio companies.

The researchers argue that their index of public companies should show roughly the same returns as the private equity industry. “All things being equal, an auto parts company that is publicly traded will have the same value as an identical auto parts company that is privately owned,” Hooke, who is an executive at Focus Investment Banking, said.

Instead, though, the private equity industry’s stated returns were noticeably less volatile than the publicly traded companies’ returns. The researchers assert that the private equity industry uses its latitude to self-value its own portfolios in order to make their returns look “smoother” than they actually are. “Investors may have been unfairly induced into placing monies into these investment vehicles,” they conclude.

The CalPERS website says “there are no generally accepted standards, practices or policies for reporting private equity valuations.”

The SEC has taken notice, as well:

At the Securities and Exchange Commission, a top enforcement official in 2013 declared that the private equity companies that the agency had been scrutinizing were “exaggerat(ing)” the reported values of their portfolios. That declaration followed the release of studies by academic researchers finding evidence that valuations were being manipulated. The SEC subsequently reported that it found “violations of law or material weaknesses in controls” at more than half of the private equity firms that the agency investigated.

Read the full IBT report here.

 

Photo by Roland O’Daniel via Flickr CC License

Towers Watson Sued Over Advice That Allegedly Led to “Substantial Losses” For Pension Fund

Graph With Stacks Of Coins

Consulting firm Towers Watson faces a lawsuit from the UK’s British Coal Staff Superannuation Scheme.

The pension fund, one of the UK’s largest, alleges that Towers Watson gave them “negligent investment consulting advice” that eventually led to significant investment losses.

Towers Watson denies the allegation.

From Chief Investment Officer:

Global consulting firm Towers Watson is being sued by one of the UK’s largest pension funds for more than £47 million ($72 million).

The UK’s British Coal Staff Superannuation Scheme has filed a lawsuit in the US against the consultant alleging “negligent investment consulting advice” relating to a currency hedge.

The trustees of the £8.7 billion pension issued Towers Watson a letter of claim in September, according to a 10Q filing made to the US Securities and Exchange Commission (SEC) on November 5. The lawsuit relates to a currency hedge on a £250 million investment in a local currency emerging market debt fund, which was made in August 2008. The advice was provided by Watson Wyatt, which merged with Towers Perrin to create Towers Watson in 2010.

According to the regulatory filing, the claim alleges that the currency hedge caused a “substantial loss” to the pension fund between August 2008 and October 2012. The loss was valued at £47.5 million by the pension fund.

A spokesperson for Towers Watson told CIO that the firm “disputes the allegations brought by the British Coal Staff Superannuation Scheme and intends to defend the matter vigorously.”

The SEC filing stated: “Based on all of the information to date, and given the stage of the matter, [Towers Watson] is currently unable to provide an estimate of the reasonably possible loss or range of loss.”

The consultant was set to have issued a letter on the matter to the pension fund on or before December 23, 2014, the filing said.

The British Coal Staff Superannuation Scheme declined to comment.

The British Coal Staff Superannuation Scheme manages over $13 billion in assets.

 

Photo by www.SeniorLiving.Org

Private Equity Firm Allows Investors to Hire Advisor to Monitor Governance, Review Financial Records

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A New York Times report over the weekend posed the question: is private equity becoming less private?

One private equity firm, Freeman Spogli & Company, recently revealed that it allowed investors in one of its funds to hire an outside adviser to “monitor the fund’s practices”.

Investors in the fund include several of the country’s largest pension funds, including the New York State Common Retirement Fund.

From the New York Times:

Is private equity about to get a little less private?

Perhaps so, judging by the decision of a venerable private equity firm to allow investors in one of its funds to hire an independent adviser to monitor the fund’s practices. Beyond reviewing the books and financial records at the fund, the outside adviser would also be permitted to scrutinize the fund’s governance practices for conflicts of interest, the firm said.

This shift in practice, which has not been previously reported, was disclosed to investors in June by Freeman Spogli & Company, a $4 billion private equity firm created more than 30 years ago, in a letter laced with legal jargon that obscured the import of the decision.

The new policy applied to the firm’s newest fund: FS Equity Partners VII, which opened for investment this year and has closed with $1.3 billion in committed funds. Investors in that fund include pension funds and public investments, such as the Kansas Public Employees Retirement System, the New Mexico State Investment Council and the New York State Common Retirement Fund.

[…]

Allowing the appointment of a monitor is no small matter. Giving an outsider routine access to internal fund operations is practically unknown in the $3.5 trillion private equity industry, where powerful firms operate in near secrecy and hold so much sway that many investors say they feel fortunate to be allowed to put money into the funds. The independent adviser will report to the fund’s investors.

Karl Olson is a partner at Ram, Olson, Cereghino & Kopczynski who has sued the California Public Employees’ Retirement System, known as Calpers, to force it to disclose fees paid to hedge fund, venture capital and private equity managers. He said he had never seen a provision allowing an independent monitor at a private equity fund.

“It does seem like a step in the right direction because too often the limited partners are unduly passive,” he said, referring to investors. “They should feel they are in the driver’s seat and that they have an obligation to drive a hard bargain with the funds.”Phone calls seeking comment at both the New York and Los Angeles offices of Freeman Spogli were not returned.

The NY Times report speculates that the firm may have allowed the hiring of the independent adviser after the SEC began asking questions about “several of the firm’s practices”.

More Details Emerge About SEC, DOJ Probe Into State Street Pension Business

SEC Building

State Street won a $32 billion contract from Ohio’s retirement systems after the firm hired a lobbyist who had a cushy relationship with Ohio’s then-deputy treasurer. The deputy treasurer, in turn, had oversight of the contract.

That allegation is one among several levied against State Street by the Department of Justice and the SEC, who are probing the way State Street solicited public pension business.

From the Wall Street Journal:

Federal officials are examining the connections between Boston financial giant State Street Corp. and an Ohio lobbyist as part of a broader look at the company’s dealings with public pension funds, according to people familiar with the investigations.

The scrutiny from the Justice Department and the Securities and Exchange Commission centers on State Street’s hiring of the lobbyist in 2010, several months before winning a contract to provide administrative services for $32 billion in three of Ohio’s largest retirement systems.

[…]

In Ohio, the investigation in part concerns the relationship between lobbyist Mohammed Noure Alo and Ohio’s then-deputy treasurer, Amer Ahmad. The men were in touch roughly 14 times a day over a certain period via text and phone, according to court testimony from an agent with the Federal Bureau of Investigation. The treasurer’s office had oversight of the contract.

State Street’s interactions with Mr. Alo, the founding member of a Columbus law firm, began in early 2010, when Mr. Alo met a State Street representative at a campaign event for the state treasurer, according to the FBI agent’s testimony last week during a U.S. court hearing. State Street contacted him with a draft contract for work as a lobbyist and Mr. Alo forwarded that document to Mr. Ahmad, the FBI agent said.

Mr. Alo, who became a registered Ohio lobbyist in 2010, also approached Bank of New York Mellon Corp. with the same request, leaving a voice mail claiming the bank’s existing business with the state was “not really guaranteed to stay with you,” according to the testimony. Both banks were vying for a contract to handle assets held by three Ohio pension funds. Bank of New York Mellon didn’t retain Mr. Alo, while State Street eventually agreed in the contract to pay him $16,000 upfront, according to the FBI testimony. BNY Mellon declined to comment.

Federal officials uncovered what they described as a separate $3.2 million kickback scheme involving an Ohio securities broker and the Ohio treasurer’s office while investigating the State Street deal. They brought charges in that case against Messrs. Alo and Ahmad and two other men. All four have pleaded guilty.

The lobbyist, Mohammed Noure Alo, hasn’t been accused of breaking the law in this instance by the SEC of DOJ. But he does have a recent criminal history. From the WSJ:

Mr. Alo, who hasn’t been accused of any wrongdoing surrounding the State Street contract, pleaded guilty in December 2013 to wire fraud as part of a separate bribery and money-laundering case. A U.S. judge sentenced him to four years in prison on Wednesday for his role in the scheme, during which he accepted $123,000 from a securities broker picked by the treasurer’s office to handle certain trades for the state. Mr. Alo’s lawyer declined to comment.

Pension360 reported on Monday that State Street had admitted in a regulatory filing to being probed by the SEC and the DOJ.

Private Equity Firm Threatens To Shut Out Iowa Pension Over FOIA Request

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Over at Naked Capitalism, Yves Smith has penned a long post expounding on the practice of private equity firms dissuading public pension funds from complying with FOIA requests related to investment data – often with the threat of shutting out pension funds from future investment opportunities.

The post stems from yesterday’s Wall Street Journal report covering the same topic.

Here’s the Naked Capitalism post in full:

_________________________________

By Yves Smith

A new story on private equity secrecy by Mark Maremont at the Wall Street Journal started out with a bombshell, that of private equity industry kingpin KKR muscling a public pension fund to deny information requests about KKR’s practices:

KKR & Co. warned Iowa’s public pension fund against complying with a public-records request for information about fees it paid the buyout firm, saying that doing so risked it being barred from future private-equity investments.

In an Oct. 28 letter to the Iowa Public Employees’ Retirement System, KKR General Counsel David Sorkin said the data was confidential and exempt from disclosure under Iowa’s open-records law. Releasing it could cause “competitive harm” to KKR, the letter said, and could prompt private-equity fund managers to bar entree to future deals and “jeopardize [the pension fund’s] access to attractive investment opportunities.”

The article also demonstrated, as we’ve pointed out earlier, than many investors are so cowed that they don’t need to be on the receiving end of overt threats:

Once public pension funds start releasing detailed information in response to public-records requests, “that’s the moment we’re done,” said Linda Calnan, interim chief investment officer of the Houston Firefighters’ Relief and Retirement Fund. “These are sensitive documents that managers don’t want out there.”

This risk, that private equity funds might exclude public pension funds that the general partners deemed to be insufficiently zealous in defending their information lockdown, has long been the excuse served up public pension funds for going along with these secrecy demands. As we demonstrated in May, the notion that the information that the funds are keeping hidden rises to the level of being a trade secret or causing competitive harm is ludicrous. We based that conclusion on a review of a dozen limited partnership agreements, the documents that the industry is most desperate to keep under lock and key.

But the only known instance of that sort of redlining actually taking place, as the Journal notes, took place in 2003 after CalPERS said it would start publishing limited data on financial returns as a result of a settlement of a Public Records Act (California-speak for FOIA) lawsuit. As we wrote in April:

Two venture capital firms, Sequoia and Kleiner Perkins, had a hissy fit and refused to let funds that would disclose their return data invest in them. Now this is of course terribly dramatic and has given some grist to the public pension funds’ paranoia that they’d be shut out of investments if they get too uppity. But the fact is that public pension funds overall aren’t big venture capital investors. And people in the industry argue that there was a obvious self-serving motive for Sequoia to hide its returns. Sequoia has launched a number of foreign funds, and many are believed not to have performed well. Why would you invest in Sequoia’s, say, third India fund if you could see that funds one and two were dogs?

So why has industry leader KKR stooped to issue an explicit, thuggish threat? Why are they so threatened as to cudgel an Iowa pension fund into cooperating with KKR and heavily redacting the response? Just as with the Sequoia and Kleiner Perkins case, it’s naked, and not at all defensible self interest.

Law firm Ropes & Gray, which counts Bain Capital among its clients, issued what amounted to an alarm to its private equity and “alternative investment” clients over an increase in inquiries to public pension funds about the very subject that the SEC had warned about in May, about fee and expense abuses, as well as other serious compliance failures. It’s a not-well-kept-secret that many investors were correctly upset about the SEC’s warnings, and some lodged written inquires with general partners as to what specifically was going on. We’ve embedded an unredacted example of one such letter at end of this post. It was the same one that CalPERS board member JJ Jelincic used to question investment consultants last month because the letter ‘fessed up to an abusive practice called evergreen fees.

Journalists like Maremont and interested members of the public have written public pension funds to obtain the general partners’ responses to these questionnaires. And this is a matter of public interest, since shortfalls in private equity funds, even minor grifting, is ultimately stealing from beneficiaries, and if the pension fund is underfunded, from taxpayers. Yet notice how Ropes & Gray depicts questions about what are ultimately taxpayer exposures as pesky and unwarranted intrusions:

We have recently observed a surge in freedom-of-information (“FOIA”) requests made by media outlets to state pension funds and other state-government-affiliated investment entities. Although the requests have so far concentrated on information related to private equity sponsors, they have also sought information about investments with other alternative investment fund sponsors. The requests tend to focus on information about advisers’ treatment of fees and expenses, issues raised as areas of SEC interest in a speech by an SEC official earlier this year. The requests may also ask for information concerning recent SEC examinations of fund managers. Many state-level FOIA laws exempt confidential business information, including private equity or other alternative investment fund information in particular, from disclosure. Nonetheless, record-keepers at state investment entities may reflexively assume that all information requested should be disclosed. But a prompt response, supported by the applicable state law, can help ensure that confidential information that is exempt from FOIA disclosure is in fact not released.

The sleight of hand here, which we’ve discussed longer-form, that merely asserting that something is confidential does not exempt it from disclosure. In fact, if you look at the examples from selected states that Ropes & Gray cites in its missive, states have tended to shield certain specific types of private equity information from disclosure, including limited partnership agreements and detailed fund performance information, but generally restrict other disclosures not on the basis of mere confidentiality but on trade secrecy or similar competitive harm, meaning the private equity firm’s competitors might learn something about the fund’s secret sauce if they obtained that information.

Please look at the first letter at the end of this post and tell me what if anything in it is so valuable that competitors might seek to copy it. Contrast that with a second letter from a Florida pension fund, from KKR that the Journal obtained and see how much is blacked out.

The fact is that the various FOIAs focused on getting at SEC abuses aren’t about protecting valuable industry intelligence, to the extent there really is any in any of their documents; it’s simply to hide their dirty laundry. The Wall Street Journal story reports how in Washington, Florida, and North Carolina, public pension fund officials have been acceding to private equity fund “concerns” and using strategies ranging from foot-dragging to woefully incomplete disclosure to outright denial to stymie inquiries.

The interesting thing about KKR’s exposure is that its defensiveness is likely due to how much scrutiny it is getting from the SEC. Maremont earlier exposed how KKR’s captive consulting firm KKR Capstone appeared to be charging undisclosed, hence impermissible fees to KKR funds. KKR has attempted to defend the practice by arguing that KKR Capstone isn’t an affiliate. We debunked that argument here.

Even though we have criticized the SEC for its apparent inaction on the private equity front, in terms of following through with Wells notices after describing widespread private equity industry malfeasance, we have been told that the agency is in the process of building some major cases against private equity firms. Given how many times KKR’s name has come up in Wall Street Journal, New York Times, and Financial Times stories on dubious private equity industry practices, one has to imagine that KKR would be a likely target for any action that the SEC would consider to be “major”.

This is an area where readers can make a difference. The one thing public pension funds, even one like CalPERS, are afraid of is their state legislature. Call or e-mail your state representatives. If you have the time and energy, also write to the editor of your local paper and the producers of your local television station. Tell them you’ve read in the New York Times and the Wall Street Journal (and if you are in California, the Sacramento Bee) about public pension funds refusing to provide information to members of the public about fees as well as widespread abuses that the SEC discussed at length in a speech this year. Tell them that the SEC has made it clear that private equity can’t be treated on a “trust me” basis any more. The time has come for more pressure on public pension funds to weight the public interest more strongly in dealing with these inquiries, and if needed, new legislation to force more accountability from private equity funds and their government investors.

CalPERS Board Asks Private Equity Consultants: Are “Investors Having Their Pockets Picked” By Evergreen Fees?

http://youtu.be/gn7XSqZZanU

Over at Naked Capitalism, Yves Smith has posted an extensive analysis of the October 13th meeting of CalPERS’ investment committee.

At the meeting, the committee heard presentations from three consultants: Albourne America, Meketa Investment Group, Pension Consulting Alliance.

The meeting gets interesting when one committee member asks the consultants about “evergreen fees”.

[The exchange begins at the 34:30 mark in the above video].

From Naked Capitalism:

The board is presented with three candidates screened by CalPERS staff. Two, Meketa Investment Group and Pension Consulting Alliance, are established CalPERS advisors. There’s one newbie candidate, Albourne America. Each contender makes a presentation and then the board gets a grand total of 20 minutes for questions and answers for each of them. This isn’t a format for getting serious.

To make a bad situation worse, most of the questions were at best softballs. For instance, Dana Hollinger asked what the consultants thought about the level of risk CalPERS was taking in private equity program. Priya Mathur asked if the advisors could do an adequate job evaluating foreign managers with no foreign offices. Michael Bilbrey asked how the consultants kept from overreacting to positive or negative market conditions.

One board member, however, did manage to put the consultants on the spot. The answers were revealing, and not in a good way. The question came from J.J. Jelincic, where he asks about a particular type of abusive fee, an evergreen fee.

Evergreen fees occur when the general partner makes its portfolio companies, who are in no position to say no, sign consulting agreements that require the companies to pay fees to the general partners. It’s bad enough that those consulting fees, which in industry parlance are called monitoring fees, seldom bear any resemblance to services actually rendered. Over the years, limited partners have wised up a bit and now require a big portion of those fees, typically 80%, to be rebated against the management fees charged by the general partners.

So where do these evergreen fees come in? Gretchen Morgenson flagged an example of this practice in a May article. The general partner makes the hapless portfolio company sign a consulting agreement, say for ten or twelve years. The company is sold out of the fund before that. But the fees continue to be paid to the general partner after the exit. Clearly, the purchase price, and hence the proceeds to the fund, will have been reduced by the amount of those ongoing fees, to the detriment of the fund’s investors. And with the company no longer in the fund, it is almost certain to be no longer subject to the fee rebates to the limited partners.

[…]

Jelincic describes the how the response said that the fees are shared only if the fund has not fully exited its investment in the portfolio company. Jelincic asks if that’s an example of an evergreen fee, and if so, what CalPERS should do about it.

Naked Capitalism on the consultants’ responses:

The response from Albourne is superficially the best, but substantively is actually the most troubling. The first consultant responds enthusiastically, stating that CalPERS is in position to stop this sort of practice by virtue of having a “big stick” as the SEC does. He says that other funds aren’t able to contest these practices.

The disturbing part is where he claims his firm was aware of these practices years ago by virtue of doing what they call back office audits. That sounds implausible, since the rights of the limited partners to examine books and records extends only to the fund itself not to the general partner or the portfolio companies (mind you, some smaller or newer funds might consent). But the flow of the fees and expenses that the limited partners don’t know about go directly from the portfolio company to the general partner and do not pass through the fund. How does Albourne have any right to see that?

But if they somehow really did have that information, the implication is even worse. It means they were complicit in the general partners’ abuses. If they really did know this sort of thing and remained silent, whose interest were they serving? It looks as if they violated their fiduciary duty to their clients.

The younger Albourne staffer claimed a lot of the fees were disclosed in footnotes and that most limited partners have been too thinly staffed or inattentive to catch them. That amounts to a defense of the general partners and if Albourne really did know about these fees, Albourne’s inaction.

However, The SEC doesn’t agree with that view and they have the right to do much deeper probes than Albourne does. From SEC exam chief Drew Bowden’s May speech:

[A]dvisers bill their funds separately for various back-office functions that have traditionally been included as a service provided in exchange for the management fee, including compliance, legal, and accounting — without proper disclosure that these costs are being shifted to investors.

For these fees to be properly disclosed, they had to have been set forth in the limited partnership agreement or the subscription docs for the limited partners, meaning before the investment was made, to have gotten proper notice. Go look at any of the dozen limited partnership agreements we have published. You don’t see footnotes, much the less other nitty gritty disclosure of exactly who pays for what. Not very clear disclosures after the limited partners are committed to the funds, to the extent some general partners provide them, do not constitute proper notice and consent.

Meketa was clearly not prepared to field Jelincic’s question and waffled. They effectively said they thought the fees were generally permissible but more transparency was needed. They threw it back on CalPERS to be more aggressive, particularly on customized accounts, and urged them work with other large limited partners.

Pension Consulting Alliance was a tad less deer-in-the-headlights than Meketa but in terms of substance, like Albourne, made some damning remarks. The consultant acted if evergreen fees might be offset, which simply suggests he is ignorant of the nature of this ruse. He said general partners are looking to do something about it, implying they were intending to get rid of them, but said compliance was inconsistent. Huh? If the funds intend to stop the practice, why is compliance an issue? This is simply incoherent, unless you recognize that what he is actually describing is unresolved wrangling, not any sort of agreement between limited and general partners that charge these fees on this matter. He also said he would recommend against being in funds that have evergreen fees. But there was no evidence he had planned to be inquisitive about them before the question was asked.

You’ll notice that all of the answers treat the only outcome as having CalPERS, perhaps in concert with other investors, be more bloody-minded about evergreen and other dubious fees. You’ll notice no one said, “Yes, you should tell the SEC this stinks. You were duped. You should encourage the SEC to fine general partners who engaged in this practice and encourage the SEC to have those fees disgorged. That would to put an end to this. Better yet, tell the general partners you’ll do that if they don’t stop charging those fees and make restitution to you. That’s the fastest way to put a stop to this and get the most for your beneficiaries.” Two of the three respondents said CalPERS is in a position to play hardball, so why not take that point of view to its logical conclusion?

But this is what passes for best-of-breed due diligence and supervision in public pension land. Imagine what goes on at, say, a municipal pension fund.

Read the entire Naked Capitalism post, which features more analysis, here.

Governorship Presents Conflict of Interest For Bruce Rauner, Pension System

http://youtu.be/Ge1jo2KwyNA

 

Illinois’ GOP candidate for governor, Bruce Rauner, touts in a recent ad (above) that his investment firm, GTCR, made millions for the state by helping the Teacher’s Retirement System (TRS) invest its pension assets in private equity investments.

The investments apparently returned 17 percent – but returns aren’t the issue.

There may be a serious conflict of interest if Rauner is eventually elected governor. That’s because the governor appoints six trustees to the TRS Board—and GTCR still manages investments for the fund.

That wouldn’t be a big problem, except Rauner is still a partner at a GTCR subsidiary.

David Sirota explains:

Despite assertions that Rauner has retired from GTCR, SEC documents confirm that Rauner remains a partner in a GTCR subsidiary. There are other ownership stakes in GTCR funds listed in Rauner’s campaign finance disclosure forms. And according to state documents, GTCR currently manages Illinois pension funds, meaning that if elected, Rauner would appoint the board of a pension system that employs — and pays fees to — his firm.

If Rauner became governor, he would elect nearly half of the board of trustees of the Teacher’s Retirement System. From the TRS website:

TRS is governed by a 13-member Board of Trustees. Trustees include the state superintendent of education, six trustees appointed by the governor, four trustees elected by contributing TRS members, and two trustees elected by TRS annuitants. Two appointed positions are vacant.

As David Sirota writes, there are other issues surrounding Rauner’s tenure at GTCR, as well:

Rauner’s campaign ad comes as his investments hold center stage in a federal civil trial. Chicago’s NBC affiliate says that the suit involves allegations “that GTCR, the Chicago-based firm where Rauner served as managing partner for decades before retiring in 2012, may have masterminded an operation to allegedly avoid responsibility for the deaths of elderly patients residing in nursing homes it had invested in.”  The Chicago Tribune says that GTCR is being “accused by attorneys for the estates of several former nursing home patients of engineering a complicated 2006 sale to avoid wrongful death judgments.”

GTCR denies the allegations.

Rauner promotes a pension plan that would freeze the pensions of current workers and shift all workers into a 401(k)-type plan.

 

Photo by By Steven Vance via Wikimedia Commons

Some Private Equity Firms Want More Opacity In Dealings With Pension Funds

two silhouetted men shaking hands in front of an American flag

Private equity firms are growing uncomfortable with the amount of information disclosed by pension funds about their private equity investments.

PE firms are cautioning their peers to make sure non-disclosure agreements are in place to prevent the public release of information that firms don’t want to be made public.

Stephen Hoey, chief financial and compliance officer at KPS Capital Partners, said this, according to COO Connect:

“We had correspondence with a municipal pension fund relating to the Limited Partner’s inquiry regarding the SEC’s findings from our presence exam. We objected to our correspondence with the LP of matters not relating to investment performance including notes taken by the LP representatives being submitted to reporters under the Freedom of Information Act (FOIA). It is our communications with LPs other than discussions about performance metrics that we object to being in the public domain.”

Pamela Hendrickson, chief operating officer at The Riverside Company, said PE firms should know exactly what pension funds are allowed disclose to journalists. From COO Connect:

“GPs should make sure their LP agreements and side letters are clear about what can be disclosed under a Freedom of information request. GPs must comply with any non-disclosure agreements they have with their portfolio companies and information provided under the Freedom of Information Act should be restricted to ensure that the GPs remain in compliance,” said Hendrickson.

It’s already very difficult for journalists to obtain details and data regarding the private equity investments made by pension funds.

But PE firms are worried that the SEC will crack down on fees and conflicts of interest:

The SEC has recently been questioning private equity managers about their deals and fees dating all the way back to 2007. There is speculation the US regulator could clamp down on private equity fees following its announcement back in 2013 that it would be reviewing the fees and expenses’ policies at hedge funds amid concerns that travel and entertainment costs, which should be borne by the 2% management fee, were in fact being charged to end investors.

“The SEC is taking a strong interest in fees, and this has become apparent in regulatory audits as they are heavily scrutinising the fees and expenses that we charge. Following the Bowden speech, we received a material number of calls from our Limited Partners whereby we explained our fee structure and how costs were expensed accordingly. We also pointed out that our allocation of expenses was in conformity with the LP agreements, which is the contract between the General Partner and a fund’s limited partners,” said Hoey.

COO Connect, a publication catering to investment managers, encourages PE firms to use non-disclosure agreements to prevent the public release of any information the firms want to remain confidential.

 

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